The outlook for the US life insurance sector has been changed to negative from stable, owing to the unprecedented economic turmoil from the coronavirus pandemic amid the decline in US Treasury rates and a higher likelihood of a prolonged low rate environment, Moody’s Investors Service says in a new report.
US life insurers have been significantly challenged by lower-for-longer interest rates, particularly at the long end of the curve, a credit negative for the sector. “Over time, we expect much of the impact of low rates will affect insurers' earnings and reduce interest-sensitive product earnings because of spread compression, which is prevalent in the already sizable blocks of the industry's liabilities at minimum guaranteed rates,” Moody’s Vice President Manoj Jethani says.
“There is also the risk of more sizable charges on a GAAP and statutory accounting basis, as insurers review the viability of their long-term interest rate assumptions.”
While interest rates have been relatively low for more than a decade, insurers have taken steps to manage the current environment, but earnings of interest-sensitive products through spread compression will continue to see further declines. Moreover, an increase in defaults or a sharp drop in returns from alternative investments could also cause some insurers to reduce return assumptions.
Although capital is strong, a ratings migration could pressure capital this year. Life insurers match long-duration liabilities with similar duration investments, typically with a material allocation to corporate bonds.
The severe economic shock across sectors, regions and markets could result in an uptick in rating downgrades and corporate bond defaults, which could weaken capital adequacy in 2020. For more research and insight on the coronavirus (COVID-19) outbreak, please see moodys.com/coronavirus.